Over the course of its history as a publicly-traded company, Netflix (NFLX -1.13%) has treated its shareholders very well. Provided one held the stock through all its ups and downs over the years, a $1,000 investment at the IPO would be worth $189,000 today. On the other hand, that same investment was worth more than $500,000 at the end of 2021. And 2022 has not been kind to the streaming leader.
Subscriber growth has been slowing for several quarters now, but this most recent report sent shares tumbling more than 37%. It appears that Netflix's time as a hypergrowth company may be behind it, at least in the near term.
So what does that mean for the stock as an investment? Is now a good time to buy shares at a steep discount? Let's take a closer look.
The bad news
Netflix reported Q1 2022 earnings earlier this week. The shareholder letter started with the sentence, "Our revenue growth has slowed considerably," which is not the opening line anyone wanted to see.
The fact is that revenue growth has been slowing for quite some time. In the first quarter of 2021, Netflix had year-over-year revenue growth of 24%. It has fallen each quarter since, ending at just 9.8% in the first quarter of 2022. Management attributed this slowing growth to its already-high household penetration as well as the high amount of password sharing (more on that later).
What shook shareholders, even more, was Netflix's dismal subscriber numbers where subscriber growth was 6.7% year over year. That ratio was significantly lower than the year-ago quarter when subscriber growth was 13.6%. What was more concerning was that for the first time in over a decade, Netflix actually lost members sequentially. The first quarter ended with 221.6 million subscribers, down from 221.8 in the fourth quarter of 2021. Some of this loss was attributed to the impact in Russia and Ukraine, but it's clear that increased competition is finally starting to impact Netflix significantly.
Reason for hope
There's no sugarcoating the bad parts of this report, but rumors of Netflix's death may be greatly exaggerated. While investors should always take management's comments with a grain of salt, Netflix sees two distinct opportunities for growth.
Well over half of the world's homes don't yet have broadband, demonstrating the potential opportunity for Netflix to expand over time. Realizing that Netflix won't be alone in trying to capture this market, the company has been focusing on creating content specifically for its international audience, rather than simply exporting its domestic content. This will cost more in content creation, but if it's a strategy that works, it could give Netflix an edge.
The second opportunity exists within the over 100 million households that use another household's account. Netflix had already been testing two new paid sharing features in some Latin American markets as a way to capture some of this lost revenue. Netflix claims that over time, growth in its average revenue per membership (ARM), revenue, and viewing time will become more important than membership growth. Time will tell if this is true, and there's always a chance that its efforts to monetize those sharing passwords don't result in more paid subscriptions.
So is Netflix worth it?
It's likely that the past returns for shareholders won't be repeated moving forward. For those who own shares, the level of pain is proportional to when those shares were purchased. As mentioned, if you've held for decades, this has still been a winning investment. For Netflix to be a winning investment for investors moving forward, the company will need to regain its subscriber growth, either by international expansion or by cracking down on password sharing. It also needs to remain free cash flow positive in 2022 and beyond.
For those who believe Netflix can see its way through this rough patch, the valuation is attractive. As of this writing, Netflix's price-to-sales ratio is 3.2, the lowest it's been since 2013. However, even at this valuation, it might make sense to find better places for your investment dollars, as the risk-reward may not be worth it in the end.